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Rules Surrounding Share Capital

What is the Significance of Share Capital?

With anylimited companythat is limited by shares there are going to be issues surroundingthe chosen share capital. Typically and in basic shelf companies there will be 100 shares of1 available and these will be issued to the founding share holders in whatever proportion isrequired. Shareholders are essentially the owners of the company and therefore the split ofthe shares is critical in dictating who owns what proportion of the company.

The shares are also an indication of who has the rights to make decisions over the company.Typically this offers opportunities through the use of share capital arrangements to determinedifferent rights in terms of dividends or voting rights. Protecting these rights is thereforeoften central to the operation of the organisation. Share capital is also used as a way of

protecting creditors as the level of shareholding indicates the amount of money in thecompany to pay off debts.

Maintenance of Capital

The share capital of a company is the property of the company and not the shareholders.Whenshareholderspay for shares at whatever value, the amount is then paid into thecompany and therefore it is the companys responsibility to maintain this capital. The

principle of maintaining share capital is therefore essential to the protection of creditors as ifthe share capital could be reduced at any point it would be detrimental to those forwardingcredit to the organisation.

As a result there are rules in place that will allow money to be paid back to shareholders anda reduction of share capital in limited circumstances only. These have been simplified underthe 2006 Act to allow private companies to undertake the process without court approval.There are of course greater control on public companies.

Essentially in order to reduce the level of capital it will be necessary for the directors to givean assurance of liquidity to the creditors going forward. Where this guarantee is given and thecompany later folds, it is possible for the creditors to personally claim any losses againstthose directors that made the false declaration.

Alterations of Share Capital

Share capital can be changed within the structure of the company at any point and for a widerange of reasons. Since the 1st October 2009 there have been limits placed on the way inwhich the share capital can be altered with a limited company. These provisions arecontained in parts 17 and 18 of the 2006 Act and are now relevant for all companies formedafter this date. Transitional arrangements are in place to deal with companies formed prior tothis date.

Limited companies are able to alter their share capital in several ways namely, increasing

their share capital by allotting shares that are new to either existing shareholders or newshareholders. Share capital may also be reduced, subject to certain rules as stated above.

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Shares can also be sub divided or consolidated as required and new share classes can beestablished again either for current shareholders or for new shareholders. This type of processis particularly useful where there is a desire to have different voting rights or rules attached toa class of shareholder.

Allotment of Shares

Under the 2006 Act the notion of having authorised share capital has been removed. Thismeans that when a company looks to allot shares they no longer have to look at whether ornot there is a sufficient authorised share capital available from which to allot the shares.There are still requirements that need to be followed when allotting shares although these arenot as great as they were previous to the 2006 Act coming into play.

Any company that only has one class of shares can, provided there is nothing to the contraryin the articles of association allot shares without the need to get approval from the members.This gives full authority to the directors to allot as they see fit.

Directors can allot shares where there is more than one class of shares where there is priorapproval of the shareholders through an ordinary resolution or where it is stated as allowed inthe articles of association. Public companies have a much wider range of requirements placedon them, primarily contained in the listing rules.

Other Issues with Share Capital

Pre-Emption Rights

A right is given to shareholders to have a first refusal over any new shares that are beingallotted by the directors. This is to ensure that the existing shareholders do not see their shareholding being diluted by directors simply allotting more shares to other shareholders. These

pre-emption rights can be written out of the articles but should be considered as part of anyshareholder arrangement and in particular as part of the shareholder agreements.

Share Buy-backs

In a similar way to the generic area of reduction of capital, any form of share buy back by thecompany needs to be considered carefully with the directors offering statements of solvencyto support and protect the creditors.

Types of Rights Attached to Shares

Some shares may have voting rights that others do not, or enhanced votingrights when certain decisions are being made. Shares may derive dividends or may not depending on the rules attached. There may also be differences in terms of transfer provisions with limits being

placed on certain shareholder classes.

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The Roles and Duties of Shareholders

What are shareholders?

The shareholders of a company are its financial supporters; they provide finance to acompany by purchasing shares in it, and through this become shareholders. This gives themcertain rights as shareholders; they also have roles and duties to adhere to, which are set outin the Companies Act 2006 (or Companies Act relevant to the date that the company wasformed). As shareholders of a company, they are protected from liabilities as the company islimited. Shareholders may or may not be directors of the company also. Whilst directors are

in charge of running the day to day business of the company and making decisions, theshareholders have a few specific roles and duties to ensure they ultimately have control overthe company.

Roles of the Shareholders

Major decisions which would have an effect on the shareholders rights are usually required,

through the Companies Act 2006, to be approved by the shareholders at a general meetingcalled by the directors of the company.

Only certain acts can be done by the shareholders such as; removing a director from office,changing the name of the company, or authorising a service contract for a director whichgives him job security for more than two years. In general, shareholders have little powerover the directors and how they run the company, but their main role is to attend meeting anddiscuss what ever is on the agenda to ensure the directors do not go beyond their powers.

General Meetings

To fulfil the role of being a shareholder, a shareholder may require a general meeting to becalled rather than simply have all decisions made through written resolutions. The directorswill in fact call a general meeting, despite not being able to vote at the meeting, as this duty issolely for the shareholders. However, it is quite possible that directors will be shareholders aswell and so will vote in the board meetings for directors and in the general meetings forshareholders. The directors may call a general meeting at any time for any reason and areentitled to attend and speak as are the shareholders.

Annual General Meetings

There is no longer a statutory requirement to hold an annual general meeting if the companyis aprivate company, however the shareholders may request that one is held or the directorsmay call an annual general meeting if desired. Commonly the date of such a meeting will befixed from year to year.

Under s.336 of the Companies Act 2006 public companies must hold an annual generalmeeting six months after its accounting reference date.

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In small companies, it is often appropriate to have an annual general meeting where theshareholders are not all directors. It provides the shareholders the opportunity to review thecompany accounts and confront any directors with regard to any decisions they have made.

The chairman of the meeting

There is a presumption that the chairman of the general meeting will usually be the same asthe chairman of the board meeting. His task is to supervise the meeting and keep the generalstructure of it in order. The chairman will declare whether a resolution has passed or failedafter voting has taken place.

Duties of Shareholders

The main duty of shareholders is to pass resolutions at general meetings by voting throughtheir shareholder capacity. This duty is particularly important as it allows the shareholders toexercise their ultimate control over the company and how it is managed. Shareholders canvote in one of two ways: on a show of hands or through a poll vote where each vote will be

proportionate to the amount of shares held by each shareholder. A show of hands is usuallythe preferred method of voting that takes place at general meetings.

There are two resolutions that can be voted on at a meeting: an ordinary resolution, or aspecial resolution.

Ordinary Resolution

An ordinary resolution is passed by the shareholders if a simple majority of the shareholders

present at the meeting vote in favour of the proposal. Therefore more than 50% of the votescast will have to be favour, usually displayed through a show of hands.

Special Resolution

For a special resolution to be passed, a 75% majority must vote in favour. A specialresolution is only required if it is stated in statute or it is in the companys articles, which

suggest a special resolution would have to be used for a particular vote rather than anordinary resolution. If there is no specific mention of what type of resolution should be used,the presumption is that an ordinary resolution would be required.

The chairmans casting vote

The chairman does not have a casting vote in addition to any other vote he may have. Thecasting vote only operates if, without it, the number of votes for and against the resolution isequal. Where no chairman has been appointed by the company, the idea is that if there isdeadlock at the voting stage, the negative will prevail and the proposed resolution will fail.

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Shareholders agreements: step by step guide as to what you need to decide

If you are just looking for an agreementYou may have reached this page looking for a shareholders agreement, not information onthem. If you do just want a document, Net Lawman offers a number of comprehensive ones

at:shareholders agreements.

IntroductionOur last article covered why and when to use a shareholders' agreement: the methodsshareholders can use to control a company, and the advantages of a shareholders' agreementover using different classes of shares.

This article covers what issues you should consider and what the steps you will need to taketo draw up an agreement. Note that shareholders are also referred to as members of thecompany.

Many people wonder whether it is possible to draw their own shareholders agreement orwhether a solicitor is required. We believe that it is quite possible to draw the same qualityof document that a solicitor would do without being one, provided that you use a goodtemplate as a basis. The difficulty in drawing a shareholders agreement is not legal wording

but in considering the issues that shareholders will face and deciding what should happen ineach scenario. The more experience a solicitor has with resolving shareholder issues, themore likely he or she is to be useful in suggesting what might happen, but he or she will still

be reliant on the shareholders to tell him or her about the business and about the interests ofeach shareholder. Our suggestion is that you find a good template (from Net Lawman orone of our better competitors) and craft your own agreement from it. If later, before signing,one of shareholders insists that it is passed by a solicitor, the process should be much faster(and much less expensive) than if the solicitor had been used from the outset.

So what do you need to think about when drawing your agreement? We have 5 steps.

Step 1: Decide on the issues the agreement should coverIt is impossible to plan for every eventuality. What is more the agreement must be writtenwithin the framework of company law. For example, you cannot simply stop Bill fromvoting a certain way. You must either give Bill only a different class of shares with reducedvoting rights, or find some other words to deal with the issue without taking away his basicrights to vote his shares.

Common problem areas include the following:

Directors -v- membersWhenever some members are director and others are not, there will be potential for conflict.Pay is an obvious one. Salaries and bonuses reduce the profit that could be paid to membersas dividends. While the payment of dividends is usually approved by members, often the

payment of salaries and bonuses is approved by directors alone. When some directors arealso shareholders, there is an imbalance of power - some shareholders can decide on salarylevels and bonuses that directly affect the level of dividends that can be paid to others, or ofcourse, the cash resources left in the company.

Transfer of shares

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Shares can change hands by accident (for example, on the death or bankruptcy of ashareholder) or intentionally (for example, for personal gain, after argument or injury, or to

pay off a debt elsewhere). Other shareholders can control, to some degree, to whom theshares are transferred and what role the new member plays in the company by setting therights and powers on transfer. However, provisions that prevent the transfer to certain

specific classes of people may be contentious.

Approving a change in business directionBusinesses evolve over time, maybe by changing the products or services they offer, orwhere or how they operate. Some changes are riskier than others, particularly if theyinvolve shareholders acting in different roles (for example, trading with a company that ismajority owned by a shareholder). A shareholders agreement should set out when memberapproval is needed for such business changes. For example, business direction might bemanaged by having shareholders approve a business plan produced by the directors on aregular basis (for example at the AGM).

Managing changes in the roles shareholders playThe directors manage the company. They are responsible to the shareholders. So youragreement can specify the role a director can play or the limits of his authority. A membercan be as active as he wishes, from being a director, to being an active supporter offeringadvice, to being a "sleeping" lender providing finance only. Your agreement should reflectwhat happens when a member wants to be more or less active in the day to day managementof the company.

Injection of debtLoan agreements usually restrict what a company may do (such as take on additional debtor sell the collateral against the loan). This can gives the lender considerable power. Thereare extra complications when the lender is a shareholder. A shareholders agreement shouldconsider how rights will change on the introduction of large creditor.

CompetitionLoan or share subscription money may be offered by trading partners or even competitors.There is nothing wrong with such a deal in principle, but existing shareholders should lookvery carefully at what knowledge and power they might accidentally give to some other

person. The pleasant, easy-going person with who you deal today might be replaced nextyear by someone not so friendly. A shareholders agreement may contain provisions linkedto future trading with a shareholder or ownership of stock or other assets.

ExitAt some point, some members will want to sell their shares or wind up the company.Unfortunately, lack of knowledge of the future inhibits and restricts the arrangements youcan make in advance! You can do just two things.

One alternative is simply to set down a statement of intention. This has no legally bindingforce, except perhaps in a supporting role, but it does act as a reminder that there is a timeframe. It may be that a lender will have the benefit of a separate loan document, which does

provide the right to enforce the action or proposal in the shareholder agreement.

The second alternative is to make provision for precise alternative events.

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They might include:

sale of the company;sale of the business out of the company;some shareholders buy the others out;

a public placing of shares is sought;other third party capital is sought;the assets are sold and the company wound up.

Of course, you have to beware of severely damaging some interests in favour of others. Forexample, a shareholder-lender is in a very strong position once a loan has become due forrepayment. He may have added strength if the other shareholders have agreed to sell thecompany on a specific date - and he is the only buyer around!

Joint venturesWith regard to agreements, shareholders in joint ventures are able to decide exactly what

the deal is to be, subject only to compliance with the general law. Because parties to aventure have been discussing together for some time, the detail of what is agreed is oftenoverlooked - with disastrous consequences. In our experience, the only way to cover eventhe main alternative outcomes is to consider a multitude of possibilities. We advise that youwrite down a list of assumptions, winnowed from your business plan, then for each, startasking "what if" questions, always with a view to how the different results will affect theshareholders. The key question is always "who will have the power if?".

Preventing a former shareholder from setting up in competitionA disgruntled shareholder may decide that he can set up in competition, especially if he hasalso worked in the business. There may be linked employment issues in competition that arecovered by the employment contract, but a shareholders agreement should also include

provisions for competition. The Net Lawman template documents provide full protectionfor the company and the continuing shareholders.

Step 2: Identify the interests of shareholdersShareholders invest in companies for a large number of reasons. You should identify theinterests of each party before drafting your agreement. The most obvious reason is to

benefit financially from the value of the company increasing, but there can be others thatare equally or more important to different shareholders. These might include:

the value and timing of dividend paymentson-going employment as a director (status or benefits as well as pay)being able to influence business strategy and directionmaintenance of relationships with suppliers or customers

The purpose of the shareholder agreement is to restrict the freedom of action of the directorsand other shareholders in order to protect the rights of one of more minority shareholders.So identifying the interests of all parties is crucial. All Net Lawman shareholdersagreements cover a full list of possibilities.

In your business there may also be precise actions about which a minority would like to be

consulted. You should identify what these are as well.

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Step 3: Identify shareholder valueThe valuation of a company is highly subjective. There are lots of ways to estimate value(for example, discounted cash flow or multiples of earnings), but it is impossible to put adefinite value on a company. Even the value in the accounts is based on subjective opinionsmade by the accountant. When considering how to "protect shareholder value", remember

that each shareholder will place more value on some things than others.

Intellectual propertyIntellectual property in particular can often have huge value to a business, but little "worth"on a balance sheet. Net Lawman's shareholder agreements place particular emphasis onintellectual property because the "hidden" value can be so high. Although most companieshaven't registered patents, intellectual property can also include trading names, methods of

production, website domain names and copyrighted material.

Step 4: Identify who will make decisions - shareholders or directorsShareholders can be as active or passive in running the business as they like. But they need

to set clear boundaries with the directors. Clarity of decision making is crucial.

Conflicts of interest can occur when a director-shareholder, who as a director is accountableto all shareholders, makes an operational decision that benefits him, but not allshareholders. It is often difficult to ascertain whether he was acting as a director(accountable to all shareholders, and with a duty of care) or a shareholder (not accountableto his fellow shareholders). A good shareholders agreement should set out the decisions ashareholder-director may and may not make without agreement from others.

Disclosure of decision making is also important. A shareholder-director may be able tomake decisions that aren't reported to other shareholders. Again, clarifying what a directormay and may not do without notifying the shareholders prevents a shareholder-directorfrom acting in a way that is against the interests of the other members.

So how should you best set out what a shareholder-director may and may not do in eachrole? The answer is to use a shareholders' agreement to set out the role as a shareholder, anda directors service contract to set out the role as a director.

A directors service contract should also double as an employment agreement that sets outdisciplinary and grievance procedures. All executive directors are also employees. Thisgives shareholder-directors additional rights over non-employed shareholders because an

executive director can threaten great disturbance and expense by taking the dispute to anemployment tribunal.

Step 5: Decide how voting power of shareholders should add upTraditionally, one share "buys" one vote. The shareholder who has more than 50% of theshares can make decisions and controls the company (for some decisions, holders of morethan 75% of the shares must agree). This isn't always what shareholders want: sometimes itcan be beneficial for everyone to have an equal say and sometimes it can be beneficial togive a greater say proportionately to someone who has contributed more.

You need to set out what is a "majority" in the context of needing consent. A shareholder-

lender with 5% of the shares might insist that 100% agreement is needed for the mostimportant matters to him or her. A group of shareholders working together may decide to

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restrict a wider range of decisions, but agree that it needs only 60% of them to make suchdecisions. Keeping the equation simple is usually the best option.

Example: Adam, Bill and Colin formed a company, which they run together. Adaminvested 10, Bill invested 15 and Colin invested 25, all in 1 shares, each carrying one

vote. Without an agreement, there would be constant stalemate because Colin has the samenumber of votes as Bill and Adam together. Adam, Bill and Colin decide that they wantdecisions to be made unanimously. They draw their shareholders agreement so that certaindecisions require 100% in favour before they can be passed.

Alternatively, they could decide that having invested more than either of the other two,Colin should be entitled to enough power to make decisions by himself regardless of thewishes of the other two.

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Shareholders AgreementsThis information leaflet gives you introductory guidance to shareholders agreements. It does nothowever give youlegal advice. If you need legal advice please contact Kay Waddington in our Corporate department on01942 774169

This leaflet: Outlines matters to be discussed when entering a shareholders agreement.

OverviewThe purpose of these comments is to provide you with a starting point for matters to be discussedbetweenyourselves when entering into a shareholders agreement in relation to your company.

What is a Shareholders Agreement?A shareholders agreement is an agreement entered into between all or some of the shareholders inacompany which regulates their relationship.

It may be usual to combine the use of a shareholders agreement with a specifically drafted set of

Articles of Association for your company. Shareholders Agreements are often used as a safeguard and to give protection to shareholders,because (amongst other things) they can provide for what happens if things go wrong i.e. there is a falling out between the shareholders. Too many times people set up companies with friends andrelatives and do not consider protecting their interests in the company until it is too late. The Articlesof

Association of the Company may not offer a shareholder full protection

What different types of Shareholders Agreements are there? Company law is generally suited to the situation where the shareholders in a public company areseparate from the board of directors, and comprise a number of holdings where no single shareholderor group of shareholders have control. In such cases the directors, having the necessary expertise,are

brought in by the shareholders to manage the business of the company on their behalf. Even if thedirectors have shares in the Company, they are likely to be motivated to act in the best interests of theshareholders as a whole rather than representing the interest of the largest single shareholder.

This is not necessarily the case in private companies. Generally, in small private companies thereareusually few shareholders, and the shareholders are often the directors in the company. This is when ashareholders agreement becomes helpful because the minority shareholders, the majorityshareholders, and those holding shares equally want to ensure that their rights are protected, usuallyin ways which are not covered in the articles of association of the company.Shareholders Agreements

Minority or Equal ShareholdingsA large number of shareholders agreements are designed to contain provisions intended to protect

theminority shareholders (i.e. any person(s) with less than 50% of the issued share capital in thecompany)or those with equal shareholdings (i.e. 2 shareholders holding 50% each of the shareholding or acompany with 3 shareholders who all hold 1/3 of the shares each.

A minority shareholder in a private company is a particularly vulnerable person. This is partlybecausethere tend to be much fewer shareholders in a private company. This means it is more likely thatcontrol of the company will be held by one or two persons. There is generally no market for the sharesof a private company, and a shareholder who is unhappy at the way a company is being run does nothave the option of selling those shares. The concentration of control in one or two shareholders canlead to abuse of power, even where no single shareholder holds a majority.For example, without a shareholders agreement a shareholder who is also a director could be

removed from his

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position as director, by a mere 50% of the other shareholders voting him out. This gives him very littlesecurity, andwould leave him with a shareholding in a company in which he no longer has any management rights.See below foran illustrated example:

Newco limited is a company with three shareholders A, B & C (A 20 shares; B 35 shares and C

45shares). They are all directors of the company. In addition to their salaries, the directors, asshareholders, receive annual dividends.

If A and B in the future no longer wish to deal with C for any reason, or for example, decideunreasonably that they no longer wish to work with him and they want to remove C as a director; theyare able to do this. They can do this by passing (as shareholders) an ordinary resolution (a resolutionrequiring a majority of more than 50%).

Despite C holding the largest shareholding, he cannot prevent the passing of that resolution. C haslosthis right to participate in the management of the company. C has no right to require A or B to buy hisshares and no one outside the company is likely to be interested in acquiring them from him.

There are now remedies in the Companies Act which attempt to prevent such unfair conduct

towards aminority shareholder, but these remedies are not certain and can prove extremely costly. It is farbetterto prevent the situation arising in the first place. This is where a minority protection shareholdersagreement and minority protection articles of association could be used.

Majority Shareholders Agreements Shareholders Agreements are not just designed for those shareholders who hold less than 50% oftheshares in a company. In many cases such agreements are drafted for the majority shareholder.

The majority shareholder may wish to curb the powers of the directors if he does not have a majorityrepresentation at board level, or if he does not take an active part in the running of the business.

In the alternative, the majority shareholder may not want to include any minority protection

provisionsShareholders AgreementsShareholders Agreementsbut may want to be able to ensure that if a buyer for the company comes along he can sell all thesharesin the Company, forcing the other shareholder(s) to sell their shares. This would stop him being heldtoransom by a minority shareholder. He may also wish to consider appropriate non competition andconfidentiality covenants and provisions requiring financial input from other shareholders.

The advantages of Shareholders AgreementsAs has been previously mentioned if a Shareholders Agreement does not exist, then any disputesbetween shareholders/directors will have to be settled by what is contained within the Articles of

Association. The Articles of Association (the Articles) are one of the two constitutional documents of acompany.The Articles set out the rules as to how a company is run; for example: setting out the division ofpowerbetween the shareholders and directors and the rights which each will have.

The shareholders agreement gives a contractual remedy if its terms are broken; whereas Articlesmayprevent the event happening in the first place.

Some of the problems with having no shareholders agreement and just relying on the standardarticlesof association are as follows:

there is nothing to prevent a director from being removed by 50% of the shareholders by an

ordinary resolution

In law a Company cannot promise to do or not to do certain things. A shareholders Agreement

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could be worded to bind the Company

all major executive decisions by the directors are made by a majority, including decisions tochange the nature of the business. Therefore even though they may be a majority shareholder,as a single director they could be outvoted

even if the articles are made to protect shareholders etc, they can be amended by a 75%majority of the shareholders, in which case they could take any protection away from a

minority shareholder in the articles, by passing a special resolution

it is very difficult to deal with the resolution of any deadlock through the articlesThis is why it may well be preferable to have detailed provisions in the Shareholders Agreement tocover suchissues.

Some of the common issues dealt with by a Shareholders Agreement There are usually provisions which require certain matters to be approved by all the directors/shareholders before being acted upon, for instance, varying the salary of any directors, enteringsubstantial business contracts or commencing legal proceedings

There is usually a clause stating what the dividend policy of the company should be, and you canconsider what percentage of the post tax profits should be paid to the shareholders each year, andprovide for when the company doesnt have to pay a dividend i.e. if the company would not then be

ableto pay its debts. It may also provide for example, if a shareholder ceased to be a director and/or an

Shareholders AgreementsShareholders Agreementsemployee but remained as a shareholder they would want to see a certain percentage of the profitsdeclared as a dividend.

Occasionally a tag along right is included (i.e. the outgoing shareholder can be required to procurethata third party purchaser offers to buy the remaining shareholders shares on no less favourable termsashe is getting for his shares). Conversely, the minority may be forced to accept such an offer (drag along right). A third party purchaser is likely to want to purchase the whole of the shares in the

company. This is beneficial for majority shareholders, when ensuring they can leave the companywithout needing to worry about having to persuade all the other shareholders to sell.

There is usually a clause that has the effect of allowing the company to bring an action against, forexample, a misbehaving director which may not have otherwise been possible if that person wasthemajority shareholder and controlled the board.

There are usually restrictive covenants on the shareholders which prevents them from competingwiththe business of the company. Generally, restrictive covenants between shareholders, are more easilyenforced than those between employer and employee.

You may wish to have an obligation upon shareholders to provide further funds to the company, ifthecompany requires it and to specify the form in which this funding is to be provided.

A usual provision when any of the shareholders have given a guarantee for the companys liabilitiesandobligations, is that if those guarantees are called upon to be satisfied, the shareholders will split thecost according to their respective shareholdings.

It is usual to agree who the auditors and bankers, where the registered office and what theaccountingreference date of the company should be and that these matters should not be changed unlessunanimous agreement is reached.

One of the main issues to consider is what should happen if one shareholder wants to leave theCompany. Without any such clause in a Shareholders Agreement a shareholder who leaves may beableto sell his shares to anyone, leaving the remaining shareholder(s) running a company with someone

hedoes know, or the other shareholders could refuse to allow the shareholder to sell his shares. It is

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therefore important to have a set route in terms of how shares are to be sold. Firstly, you shoulddecideon whether shares must be offered to the remaining shareholders first. This is common and the mostpractical option in most cases. This way, if one of the shareholders wishes to leave the company thenthe other(s) will have the option to purchase the shares from them.Most agreements provide for the outgoing shareholder to place a value on the shares, which failing

agreement on the price, would then be referred to an independent expert (i.e. the auditors) todeterminea reasonable value.The next decision would be whether the remaining shareholder(s) would be bound to buy the sharesofthe outgoing shareholder? They may not want to, or be able to afford to, in which case you need todecide if they would have a choice or not. Problems may arise in terms of funding the purchase if theyare bound to buy and this may not be ideal.

Shareholders AgreementsShareholders AgreementsIf the shareholder refuses to buy the shares, there can always be a provision that the shares are thenoffered to the company who must buy them back if there is sufficient cash/bank facilities.You may also wish to consider whether the shares could be sold to a third party, though this could

bringabout its own problems. However, this may not be as onerous as having an unhappy shareholderlockedin to the company. The shareholders agreement helps iron out such issues before they arise bysettingout a clear structure to the sale or transfer of shares.

If there is no particular way out of the shareholding, or if there is a stalemate between shareholdersordirectors in any respect, then the shareholders agreement can provide for what happens if there is adeadlock, and this could include the above situation where a shareholder is locked in to thecompany.

An expert would review the situation and advise on a course of action which the shareholders must

thenfollow. Deadlock provisions are important to all agreements in general, but can be even moreimportantwhen there are only two shareholders holding 50% of the shares each, as in this instance deadlocksmay occur more frequently.

You need to consider whether any of the directors are so important to the company that the loss ofthatperson would damage the companys business. In such cases there is the possibility of the companyhaving some form of insurance against this; for example, key man insurance? Would the cost of thisinsurance be justified in relation to the benefits?

Another extremely important consideration is, what should happen if one of the shareholders dies?Anumber of undesirable situations could arise if no agreement was in place, for instance:

The surviving shareholder(s) may wish to purchase the shares of the deceased shareholdersbut the executors of that person may not wish to sell them

This leaves open the possibility of the widow/personal representatives having an involvementin the running of the business, or the right to appoint themselves as director, which thesurviving shareholder(s) may not appreciate

The executors of the deceased shareholders estate may want to sell the shares to theremaining shareholders, but they may not be able to afford it, and then the shares could besold elsewhere

A common way to avoid such situations is that the shareholders take out a life insurance policy eachandenter a cross option agreement. The life insurance policy could then be transferred into separate trusts. If one of the shareholders then died the proceeds of the policy would automatically pass to the

surviving shareholder(s). The cross option agreement could then state that the survivingshareholder(s) would have to use the proceeds to purchase the shares from the personalrepresentatives of the deceased shareholder, who in turn would be bound to sell them. This would

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benefit all parties because the surviving shareholder(s) would then own the shares and the family ofthedeceased would receive the money. This would also prevent the situation were the survivingshareholder cannot afford to purchase the shares.

The transferability of shares. Should these be at the absolute discretion of the directors or shouldthere

be rights for the shareholders to transfer to family members and into say trusts for the benefit of theirfamilies. What would be the position on death if you do not have cross option agreements?

Shareholders AgreementsShareholders Agreements

You will need to consider at what point the various shareholders are looking to exit the company?Youmay wish to consider drag-along and tag-along rights. On what terms will the sale be effected; forexample, how will the shares be valued?

Shareholders AgreementsShareholders

Rights of a share holder

More shares, more power

It may seem an obvious statement but the greater the shareholding of an individual, thegreater are his / her rights and the greater is his / her power within the Company.

This is so not only because the larger the shareholding the more likely it is to represent acontrolling interest, but also because the Companies Act affords greater rights and power toan individual as the size of his / her shareholding increases.

For example, a shareholder owning 5% of a company has the right to have an item placed onthe Agenda for discussion at a General Meeting and, once the shareholder's ownershipreaches 10% of the company, he / she has greater rights including the right to force a formalaudit of the annual accounts.

Controlling interest

In the great majority of Limited Companies, a shareholding in excess of 50% of the issuedshare capital will be enough to control the company, dictate the makeup of the Board ofDirectors and to be able to do most of the acts necessary to run the company in its everyday

business.

It is possible for those owning less than 50% of a company to protect themselves from beingat the mercy of those holding over 50% of the shares in the company and this is one reasonwhy shareholders should give serious consideration to agreeing a shareholders agreement oradopting professionally drafted Articles of Association.

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100% Shareholding - List of Rights

(includes all listed below)

Shareholder Rights

Can do anything

Pass an Elective Resolution

An elective resolution is a resolution passed by all the members of a private company entitledto attend and vote at the general meeting.

Any Restrictions

Statutory Position (CA 06)

90% Shareholding - List of Rights

Shareholder Rights

Not less than 90% (or such higher percentage, not exceeding 95%, as may be specified

by the company's Articles)

Hold an General Meeting on short notice (i.e less notice to the members than would

normally be required)

Any Restrictions

Statutory Position (CA 06)

CA 2006, s 307(4)(5)(6) & (7)

75% Shareholding - List of Rights

Shareholder Rights

Pass a Special Resolution

A Special Resolution is a resolution passed by 75% of the members present in person or byproxy and entitled to vote at a general meeting.

Not less than 21 days notice specifying the intention to propose the resolution as a specialresolution must be given to the members.

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The following are examples of matters for which a special resolution is required by CA2006:

Any Restrictions

Weighted voting rights Unfair prejudice (s 994) i.e. the court has power to set asideresolutions of members if the members with the majority of the voting power have used theirvotes for a corrupt purpose.

(See Clemens v Clemens)

Statutory Position (CA 06)

CA 2006, s 283

(a) alteration of the articles

CA 2006, s 21(1)

(b) change of name

CA 2006, s 77(1)

(c) reduction of share capital

CA 2006, s 641(1)(a)1

(d) authority for allotment of equity securities by the directors without restriction or subject tomodified restrictions

CA 2006, s 571

(e) re-registration of: an unlimited company as a limited company;

CA 2006, s 105(1)

a private company or an unlimited company as a public company; or

CA 2006, s 94(2) & s 90

a public company as a private company

CA 2006, s 105

(f) approval of certain off-market purchasers by a company of its own shares

CA 2006, ss 694, 695 & 696

(g) resolution of a company for winding up by the court; or for voluntary winding up

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50+ % Shareholding - List of Rights

Shareholder Rights

Pass Ordinary Resolution

An ordinary resolution is not defined by Companies Act 2006 but is one passed by a simplemajority (i.e 50.01%) of the votes cast by the members entitled to vote and present personallyor by proxy at the meeting.

Where CA 2006 or the articles do not specify the resolution required an ordinary resolutionwill suffice and satisfies a requirement of CA 2006 for a resolution of the company or adecision of the company in general meeting.

Decisions which may be made by ordinary resolution, include:

Any Restrictions

Statutory Position (CA 06)

(a) any item of routine business where CA 1982006 requires approval of the matter bymembers in general meeting;

(b) exercising authority to alter (but not reduce) the authorised share capital;

CA 2006, ss 617 & 618

(c) provide or renew the directors' authority to allot relevant securities;

CA 2006, s 551(8)

(d) payment of a final dividend;

(e) capitalisation of reserves;

(f) approval of transactions between the Company and "connected" persons;

CA 2006, s 190

(g) removal of a director (providing special notice of the resolution has been given).

CA 2006, s 168

Ordinary Resolution With Special Notice

Special notice of the intention to propose certain ordinary resolutions must be given to the

company.

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These resolutions requiring special notice include those proposing:

(1) The removal of a director

CA 2006, s 168(2)

(2) The appointment as auditor of a person other than the retiring auditor

CA 2006, ss 510-513

(3) The removal of an auditor before the expiration of his term of office

CA 2006, ss 510-513

25+ % Shareholding - List of Rights

Shareholder Rights

Block Special Resolution

Any Restrictions

Statutory Position (CA 06)

CA 2006, s 283

10% Shareholding - List of Rights

Shareholder Rights

The right to have the Company's Annual Accounts audited

Any Restrictions

Statutory Position (CA 06)

CA 2006, s 476

5+ % Shareholding - List of Rights

Shareholder Rights

The right to refuse to consent to short notice

Any Restrictions

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Any request must be given to the company in writing at least one week before the GeneralMeeting to which the statement relates.

Statutory Position (CA 06)

CA 2006, s 307(5) & (6)

The right to circulate a written statement

CA 2006, s 314

The right to call a General Meeting

CA 2006 s 303

Any % Shareholding - List of Rights

Shareholder Rights

The right to ask the court to call a General Meeting

Any Restrictions

Statutory Position (CA 06)

CA 2006, s 306

The right not to be unfairly prejudiced

CA 2006, s 994

The right to have the company wound up provided that it is just and equitable to do so

The right to vote

CA 2006, s 284

The right to receive notice of general meetings

CA 2006, s 310

The right to a dividend if one is declared

Directors have power (but are not obliged to) declare a dividend. Members cannot vote to paythemselves more than the directors have recommended.

Model Articles, Article 30

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The right to a share certificate

This right Depends on the Articles of the company. See the section of this site entitled"selling your shareholding".

CA 2006, s 769

A members right to have his name entered on the Register of Members

CA 2006, s 113

The right to a copy of the Annual Accounts

CA 2006, s 431

The right to an AGM

ONLY IF IN ARTICLES

The right to inspect Minutes of General Meetings

CA 2006, ss 248, 355 & 358

The right to vote

The right to inspect the register of members and index of members' names without

charge

CA 2006, s 116(1)(a)

The right to require a copy of the register of shareholders within 10 days of the request

subject to a charge

CA 2006, s 116(2)

The right to inspect the register of directors service contracts without charge

CA 2006, s 229(1)

Registers to be maintained at a Company's Registered Office

Register of Directors and Secretaries

CA 2006, s 162 & 275 to record the information required by CA 2006, ss 163 & 277

Register of Members

CA 2006, s 113

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Register of Directors' Interests in Shares

CA 2006, s 808

Register of Charges, together with copies of all instruments Containing registrationwith the Registrar under CA 1985, s295

CA 2006, ss 875-876

Minute Books

CA 2006, s 248

MINORITY RIGHTS

The corporate governance framework should ensure the equitable treatment of all

shareholders, including minority shareholders. All shareholders should have the opportunity

to obtain effective redress for violation of their rights.

The main challenges in ensuring equitable treatment of minority shareholders include:

1. Ensuring that the Board adopts a shareholders perspective when making decisions and

ensuring minority shareholders interests are protected;

2. Improvements to the corporate governance;

3. Concerns of stakeholders at large vs shareholders of the Company;

4. Improving communications and interactions between minority shareholders, Board

members and management;

All these concerns of minority shareholders will be met substantially if a corporate house is

able to ensure that the basic rights of the minority are met. These basic rights with their

constituents are mentioned below:

I. Equitable Treatment.

1. Same voting rights for shareholders within each class.

2. Ability to obtain information about voting rights attached to all classes before share

acquisition.

3. Changes in voting rights subject to shareholder vote.

4. Vote by custodians or nominees in agreement with beneficial owner.

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5. AGM processes and procedures to allow for equitable treatment.

6. Avoidance of undue difficulties and expenses in relation to voting.

II. The right to seek information

1. Right to know about the price sensitive information of the company,

2. Fairness to all shareholders irrespective of each individuals shareholdings.

3. Right to inspect the Register of Members, Directors, Charges, Debenture Holders, etc

and get copy thereof.

4. Right to receive Notice of General Meetings (the AGM or the EGM).

5.

Rights to receive annual report and audited accounts.

6. Right to receive quarterly and annual accounts.

7. Right to inspect the Minutes of General Meetings.

8. Right to be kept fully informed of what is happening in the company.

III. The right to voice opinion

1. Right to attend general meetings.

2. Right to requisition for a general meeting.

3. Right to get the court to direct the company to call a general meeting.

4. Right to appoint proxies to attend and vote at a general meeting.

5. Right to be heard and make proposals at shareholders meeting.

6. Right to vote and elect directors and fix their remuneration.

7. Right to nominate director.

8. Right to appoint auditors and fix their remuneration.

9. Right to receive dividends, if declared.

IV. Disclosure and Transparency

1. Disclosure of material information

2. Financial and operating results

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3. Company objectives

4. Major share ownership and voting rights

5. Board members, key executives and their remuneration

6. Material foreseeable risk factors

7. Material issues regarding employees and other stakeholders

8. Governance structures and policies

V. The right to seek redress

1. Common law derivative action

2. Redress mechanism under the Companies Act

3. Redress mechanism under the Securities Laws

Voting Rights

(i) Ten percent: The approval of at least 10% of the shareholders is required for the

requisition of an extraordinary general meeting for an application to the Company LawBoard (CLT) for relief, if there is oppression or mismanagement (as defined in the

Companies Act, 1956by the majority shareholders.

(ii) Fifty-one percent: The approval of a minimum of 50% of the shareholders is required

for an ordinary resolution, including for alteration of the share capital; declaration of

dividend; election, removal, and remuneration of directors; approval of annual accounts;

appointment of external auditors; appointment of other officers; and other routine matters

relating to the conduct of a company.

(iii) Seventy-five percent: At least 75% of the shareholders must approve a matter before

it is passed as a special resolution, including for capital increases, alteration in thememorandum and articles of the company, changing the registered office address of the

company from one state to another, change in the name of the company, buy-back of

shares, proposed mergers or liquidation. Therefore, a minority shareholder with more than

25% voting rights would have the ability to block special resolutions.

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Effects of depreciation

Depreciation Increases: How Does This

Impact Financial Statements?

By Chirantan Basu, eHow Contributor

Depreciation is the allocation of a fixed asset's acquisition costs over its useful or serviceablelife. Fixed assets include property, plant and equipment that have useful lives substantiallylonger than a year. Depreciation increases when a company acquires new assets or makes

substantial modifications to existing assets. Depreciation affects the income statement,balance sheet and statement of cash flows.

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1.Factso When a company acquires new assets or makes modifications to existing

assets, the journal entries are to debit (increase) fixed assets and credit(decrease) cash, assuming a cash transaction. Companies may have separate

fixed asset accounts, such as buildings, plant and equipment. The depreciationallocation is the same each year of an asset's useful life in the commonly usedstraight-line method of depreciation. The journal entries for recordingdepreciation are to debit (increase) depreciation expense, which is an incomestatement account, and credit (increase) accumulated depreciation, which is a

balance sheet account.

Income Statement

o Depreciation expense affects the operating and net income lines on the incomestatement. If depreciation expense increases, operating income and net incomewill decrease. For example, if a company buys a new computer with a usefullife of five years for $5,000, then the annual depreciation expenses are $1,000

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($5,000 divided by 5) under the straight-line depreciation method, and theoperating income and net income would fall by $1,000 each.

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Balance Sheet

o A company balance sheet has three sections -- assets, liabilities andshareholders' equity. A new asset purchase means higher fixed assets andlower cash, assuming a cash transaction. If the company acquires the asset

through bank loans or by issuing debt, then the liabilities section of thebalance sheet will increase. Net assets are equal to the acquisition cost of fixedassets minus accumulated depreciation. Therefore, a depreciation increasewould mean higher accumulated depreciation and lower net assets. Thereduced net income because of increased depreciation expenses would reduceretained earnings, which accumulates net income and is a component of theshareholders' equity section of the balance sheet.

Continuing with the example, retained earnings would fall by $1,000,accumulated depreciation would increase by $1,000 and net assets would fall

by $1,000.

Statement of Cash Flows

o The statement of cash flows usually consists of cash flows from three sources-- operating activities, investing activities and financing activities.Depreciation expense is a noncash item, which means that it has no impact oncash flow. Therefore, it adds to net income in the cash flows from operatingactivities section. To conclude the example, adding back the depreciationexpense would increase cash flow from operating activities by $1,000.

Read more:Depreciation Increases: How Does This Impact Financial Statements? |eHow.comhttp://www.ehow.com/info_8776772_depreciation-increases-impact-financial-statements.html#ixzz27qLjXjXS

Impact ofOperating Expenses on investors

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Operating Expenses

o Operating expenses refer to all of the costs incurred to keep business operatingand serving customers. These include selling expenses and general oradministrative expenses. Selling expenses consider all of the costs necessaryto serve the customer, including showroom samples, travel expenses for salescalls or sales salaries. General or administrative expenses consider all of thecosts for the business to maintain operations, including human resources,accounting or computer programming.

Income Statement

o The income statement uses total operating expenses to calculate net income.The income statement starts with the net revenues for the period, subtracts the

product costs and determines the gross profit. The company uses the operating

income and subtracts it from the gross profit to calculate operating income.Any income or expense items not considered are added or subtracted fromoperating income to determine the company's net income.

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Impact On Owner's Equityo The company's ability to control operating expenses directly impact the

owner's equity through its impact on net income. The higher the operatingexpenses, the lower the net income. The lower the operating expenses, thehigher the net income. Net income directly impacts the owner's equity. The netincome increases owner's equity by an equal amount. If the company incurs aloss, it reduces owner's equity by the amount of the loss.

Reporting Owner's Equity

o The company reports changes in owner's equity on the statement of owner'sequity. This financial statement starts with the beginning balance of theowner's capital account, which equals the ending balance from the previous

period. The company adds any additional owner investments to the balance.The company also adds the net income for the period. Any withdrawals taken

by the owner are subtracted and the new balance of owner's capital iscalculated.

Read more:Why Do Operating Expenses Affect an Owner's Equity? | eHow.com

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Effect on invest due to depreciation

Retained Earnings Statement

The statement of retained earnings reports the changes in a business's retainedearnings during one accounting time period. Retained earnings is the portion of a

business's income that is retained for further use by the business rather than paid outto its owners and shareholders. Changes in retained earnings include gains and lossesnot included on the income statement, dividends paid out and the period's net income.

Owner's Equity

Retained earnings are considered part of owner's equity, which stands for the claimthat a business's owners have on its assets after all liabilities are deducted. Sincedepreciation is an important expense on the income statement, it impacts owner'sequity through net income, which in turn impacts retained earnings. The higher thedepreciation expense, the lower the net income, the lower the retained earnings andthus the lower the owner's equity.

Read more:How Does Depreciation Affect an Owner's Equity? | eHow.comhttp://www.ehow.com/info_8055614_depreciation-affect-owners-equity.html#ixzz27qYf1eWy

How does net income affect owner's equity?

Net Income = Revenue - Expenses. Owners Equity = Net

Income + Investment of OwnersDistribution to Owners.

Value of the owners equity, is directly affected by netincome as well as investments by owners, either privately

or by stockholders.

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Beware The Company That Holds Too

Much Long-Term Debt

Read More At IBD:http://education.investors.com/investors-corner/618275-beware-the-company-with-too-much-debt.htm#ixzz27qem7Qrl

The long-term-debt-to-shareholders'-equity ratio. It sounds like an obscure calculation froman overzealous accountant.

In fact, it's a key gauge that can alert you to serious problems with a company and itsotherwise lovely looking stock.

Briefly put, the ratio gauges not just how much a company owes, but also what that long-term

debt (what is owed more than a year from now) amounts to as a percentage of the firm'sequity.

View Enlarged Image

If Starbucks (SBUX) owes $1 billion, well, that seems manageable. But if small-capSourcefire (FIRE) owes the same amount (it doesn't), you might feel uncomfortable owningthat stock.

The long-term-debt-to-shareholders'-equity ratio is found by dividing the total long-term debtby total shareholders equity, then multiplying by 100. A result over 125% tends to beperilous. But it's OK to start worrying earliersay, at about 100%.

You also might be on the alert if the company's ratio runs past 100% with sudden spurts.

If a company with a history of low debt suddenly starts borrowing at a break-neck pace, itcould be a sign of trouble.

Of course, the company may have discovered a new oil well or developed a new hot-selling

product that simply requires $1 billion of new capital. Yet many great firms use operatingcash flow to invest in future growth.

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Also bear in mind that a high debt load can mask other flaws. By borrowing, a company canartificially raise its return on equity.

That's just hinky. Conceptually, a company is not stronger just because it sold bonds insteadof stock. That's a trick you should always keep an eye out for.

Some companies and certain industries can get away with a high debt load. Financial andtelecom services are capital-intensive businesses, where it pays to borrow a lot. Also expectto see debt issuance in industries undergoing consolidation.

How do leaders finance acquisitions of the smaller fish? They have to sell either debt orequity. Of course, that goes back to the question of not letting the higher ROE impress you.

Read More At IBD:http://education.investors.com/investors-corner/618275-beware-the-company-with-too-much-debt.htm#ixzz27qevAjrA

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Caro report

Auditors Report on the financial statements of a limited company audited under the Companies Act,1956, is gaining importance year after year. That is the reason why, with changing environment inthe commercial world, amend-ments are being made in S. 227 of the Companies Act. The auditor of acompany is required to give his report in accordance with the provisions of S. 227 of the Companies

Act. S. 227(1A) requires him to make certain specific enquiries during the course of audit and report ifthere are any adverse comments on the matters listed in that section. It is proposed to enlarge thescope of this enquiry by amendments proposed by Companies (Amendment) Bill, 2003, recentlyintroduced in the Rajya Sabha. S. 227(3) lays down certain matters necessarily required to bereported upon by the auditor in his report. Recently this requirement has been enlarged, and there isalso a proposal in the Companies (Amendment) Bill, 2003, to further enlarge its scope. S. 227(4A)authorises the Central Government to specify certain matters on which the auditor has to report alongwith his report u/s.227(3). The Central Government can pass an order u/s.227(4A) in consultation

with the Institute of Chartered Accountants of India.

2. Under the powers conferred by S. 227(4A), the Central Government first issued an order called themanufacturing and other companies (auditors report) order, 1975, (MAOCARO-1975). This ordercame into force from 1-1-1976 and applied to all companies engaged in manu-facturing, service,trading and finance activities. There were in all 22 items on which auditor was required to give hisspecific report. With changes in economic environment, the above order was replaced by anotherorder called MAOCARO-1988 which come into force on 1-11-1988. This order contained 27 items onwhich auditor was required to make specific comments depending on the nature of activities of thecompany. It may be noted that the 1988 order replaced 1975 order after 13 years. Now, after 15years, the Central Government has issued, in consultation with ICAI, a new order u/s.227(4A) calledthe Companies (Auditors Report) Order, 2003. This can be called CARO-2003 which has come into

force from 1st July 2003. There are 33 items in CARO on which the auditor hasto make specific comments. Some of the items in MAOCARO-1988 and CARO-2003 are commonand some items from MAOCARO are omitted. Since some additional responsibilities are being placedon the auditor under CARO-2003, the discussion in this article is mainly restricted to the new itemsadded under this new order.3.Applicability :3.1 CARO came into force on 1-7-2003. It applies to all Companies, including foreign companiesdefined u/s.591 of the Companies Act (Act). It is, however, provided that this order shall not apply tofollow-ing companies :(i) A banking company(ii) An insurance company(iii) A company registeredu/s.25 of the Act(iv) A private limited company which satisfies the following conditions :(a) Its paid up capital and reserves do not exceed Rs.50 lacs;(b) It has not accepted any public deposits;

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(c) Its turnover does not exceed Rs.5 crores; and(d) Its outstanding loan from any bank or financial institution does not exceed Rs.10 lacs.If any of the above conditions are not satisfied, the above order will apply to the private limitedcompany.3.2 It may be noted that MAOCARO-1988, did not apply to banking, insurance and S. 25 companies.However, CARO gives relief to small private limited companies which satisfy the above conditions. Ifwe analyse the above conditions, the following conclusions can be drawn :(i) The term Reserves is not defined. Therefore, revaluation reserves, capital reserves, etc. will haveto be included. However, the credit balance of Profit & Loss Account will not be included. (ii) The expression Public Deposits is not defined. Therefore, meaning given to this term u/s.58A ofthe Act can be assigned to this term.(iii) The term Turnover is not defined. Therefore, the term as defined by ICAI for the purpose ofSchedule VI and for other accounting purposes can be considered for this purpose also.(iv) The outstanding loan from banks or financial institutions should not exceed Rs.10 lacs. It is notclarified whether this position is to be considered as at the end of the accounting year. This willrequire clarification from the Government or ICAI. In the absence of such clarification, the order willapply if the outstanding balance at any time during the year exceeds Rs.10 lacs. Further, such loanmay be on account of overdraft, cash credit, packing credit, term loan, etc.3.3 As stated earlier, MAOCARO-1988 applied to companies engaged in manu-facturing, trading,service and financial activities. On the same lines CARO applies to all such companies, excludingprivate companies which satisfy the above conditions. Para 2 of the above order, therefore, defines

the terms manufacturing and mining company, processing company, trading and servicecompany, finance and investment company and chit fund company, etc. in the same manner asdefined in Para 2 of MAOCARO.3.4 Para 3 of CARO clarifies that this order will apply to audit reports given in respect of financialstatements for the accounting periods ending on or after 1st July 2003. In other words, in respect ofaccounting period ending on or before 30th June 2003, MAOCARO-1988 will apply even if the auditorhas given his report u/s.227 on or after 1-7-2003.3.5 Para 4 of CARO states that the Auditors report u/s.227 shall include specific statement on matterslisted in this Para. Therefore, as in MAOCARO, the auditor will have to give his opinion on all thematters listed in this Para.4. Fixed assets :4.1 The reporting requirement under CARO with reference to maintenance of proper records showingparticulars and location of fixed assets, physical verifica-tion by management at reason-able intervalsand treatment of material discrepancies in the books of accounts is the same as in MAOCARO.4.2 MAOCARO required the auditor to state about revalua-tion and basis of revaluation of the fixedassets during the year. This requirement is now deleted.4.3 CARO now requires the auditor to state whether the going concern concept is af-fected if asubstantial part of the fixed assets have been disposed off during the accounting period under report.

The auditor will now be required to examine the reasons for disposal of a sub-stantial part of the

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fixed assets and to give his opinion whether the reporting on financial statements on going concernconcept is proper.5. Inventories :5.1 The reporting requirement under CARO in respect of following matters relating to inventories isthe same as in MAOCARO :(i) Whether physical verification of inventories is conducted by the management at reasonableintervals.(ii) Whether procedure for physical verification of inventories is reasonable and adequate. If not,inadequacies to be reported.(iii) Whether material discrepancies noticed on physical verification are properly dealt with in thebooks of accounts.5.2 CARO requires the auditor to report whether the company is maintaining proper records ofinventories. This is a new require-ment. Hitherto, the auditor was required to examine whetherproper records for inventories were maintained as part of his audit procedure. Now he will have tomake a specific mention about adequacy of these records in his audit report. 5.3 MAOCARO required the auditor to report whether the valuation of inventories was proper inaccordance with normally accepted accounting principles and whether this was on the same basis asin the preceding year. If there was any deviation which had material effect in the accounts, the samewas required to be reported. Now